case analysis - dr. pepper snapple group, inc

Ruth Wawin, Paida Kangai, Thomas Ulrich

Case Analysis

Dr. Pepper Snapple Group, Inc.

Ruth Wawin

Paida Kangai

Thomas Ulrich

Submitted Oct 7, 2012


Case Analysis - Dr. Pepper Snapple Group, Inc.

Executive Summary:

This case report will provide a current analysis of Dr. Pepper Snapple Group Inc.,

and whether entrance in the maturing energy drink market with the release of a new

beverage would be a profitable opportunity.

The alternatives that will be considered are to (1) introduce an energy beverage,

targeting heavy consumers, (2) introduce an energy beverage, targeting the adult niche

market or (3) not introducing an energy beverage.

In this case, we are recommending to Snapple brand manager, Andrew Barker,

to introduce an energy beverage targeting heavy consumers. This, in addition to the

marketing strategies we intend to employ, will provide the best chance at gaining

entrance into the energy drink market and taking ownership of sufficient market share

needed to ensure future success. We have based this decision on potential profit

margins, the ability to differentiate our product, and the ability to target the most

profitable market.

Problem Statement:

Dr. Pepper Snapple Group has no energy beverages in their product line; as well

they are a late adopter into the market. Mr. Barker would like to consider the opportunity

to gain market share in this high growth, high margin, energy-beverage market.


SWOT Analysis

Resource strengths:

· Strong diverse portfolio of leading consumer-preferred brands in the CSD and Non CSD brands.

· Strong brand name

· Excellent company reputation.

· Owned 18.5 percent market share in 2006 of non-alcoholic beverages

· Follow an integrated business model

· Strong Customer relationships with competitors and distributors

· Strong financial position, net sales of $5.78 billion

· Extensive geographic manufacturing and distribution capability

· Experienced executive management team (over 20 years of experience)

Problematic weaknesses:

· The only major domestic non-alcoholic beverage company in the USA without an energy drink

· Not global like competitors

· Will be a late adopter should they choose to introduce a new line of energy drink

Market Opportunities:

· Great opportunities to expand 6.2 billion dollar Energy industry and a gain in an additional customer

group

· Increase presence in high-margin channels and packages

· Less barriers to attractive foreign markets

· Acquisition, through vertical integration strategy

· Copy Red bull strategy of aggressive media promotion

· Offering a sugar-free alternative

· Offer increased functionality in the physical design of drink

External Threats:

· Increased rival intensity

Slowed growth market

Growing bargain powers of customers and suppliers


Industry

With annual sales growth rate reaching 42.5% from 2001 to 2006, the energy

beverage market has become the fastest growing non-alcoholic beverage category.

However, analysts expect this growth rate to decline to 10.5% in the next three years.

This is attributed to the market maturing, the increase in product price and the

emergence of the “hybrid” energy beverages, such as energy colas, fruit drinks and

energy water.

The energy drink segment is the ‘new wake up drug’ during the morning, ‘boost’

during the day and ‘alertness’ and ‘push’ during an evening of studying or partying. For

North America, sales are generally steady during the year unlike CSD and non CSD sales

which are affected during the cooler seasons of the year. The energy drink market does not

seem to follow a seasonal pattern.

The industry characterized by a high budget in media promotion and major sports

league sponsorships.

Company:

Being a large and highly successful brand owner, internal funding for

expenditures such as product development, market research and promotional expenses

should not be an immediate concern. DRS is a publicly traded company and this can

provide alternative avenues for any necessary fundraising through the issuance of

shares. This will all prove helpful in DRS’s ability to establish themselves as a serious

competitor in the energy beverage market.

DRS have built strong relationships with many major distributors, convenience

and supermarket chains that currently carry their CSD and NCSD products. The


distribution networks are largely already in place. This, along with the reputation of

DRS, will make the obstacle of attaining shelf/fridge space to place their new products,

less of an issue.

Consumer:

The average consumer of energy drinks is males between the ages of 12-34.

They are what are known as the “heavy users” of the drink. They drink energy drinks to

increase their mental alertness and to give them energy through the day and night.

They consume primarily in the afternoon hours, while at work, when they driving or even

just at home. This information is vital when considering marketing strategies for

introduction of a new energy drink as you are able to focus your attention on providing

convenient ways for consumers to find and purchase your product. Also, the promotions

and advertising can be honed in to appeal to the atypical energy drinker as well as

appealing to people new to energy drinks altogether.

The consumers in the energy beverage market have proven that they limit their

choice to, on average, only 1.4 brands. This suggests high brand loyalty in the energy

drink market. This may hinder DRS’s ability to get the current consumers of other

brands to give their new product a try.

Competition:

The energy drink market is full of major players as far as competition is

concerned. Not only that, but these competitors have had years of experience selling

these products. Red bull, for example, is an Austrian company who entered the market


in 1997 with aggressive marketing strategies and is the clear frontrunner in the industry.

DRS has had proven success and while they are no stranger to a bit of competition, as

they deal with many competitors in the CSD/N-CSD markets, they are “late to the party”

in this case. Lines have been drawn and market share has been acquired. DRS is set to

attempt to hurdle itself into the mix in an attempt to gain a share of the market for itself,

but is it too late?

Alternatives:

Alternative (1) Introduce energy beverage, targeting heavy users

Our first alternative is to target heavy energy drink users which are men ages 12-

34. Since this group of men is the target of many of the competitors in the energy drink

market, this alternative offers a way to differentiate ourselves. To effectively target this

group of men, while differentiating ourselves from the many competitors whom target

this group also, we will be offering a16.9 ounce aluminum can with a re-sealable screw

top priced at $3.50. The brand loyal market could see this as enough of a change to

give the new product a chance. Although the flavoring of the drink will be custom fit to

our market, the ingredients will be much the same as competitors, with only a slight

increase in caffeine and taurine content.

To successfully integrate ourselves into the mind of our targeted group of

consumers, we will be spending $12,500,000 on advertising and promotion. This is

similar to what TAB energy spent in their initial year. Given the media expenditure of the

competitors in the market, we have placed ourselves around the middle to higher end of

the competition. It is vital that Dr. Pepper Snapple Group, Inc.’s energy beverage makes


a big splash in its initial year in the market and media expenditure can be re-evaluated

for its second year in the market. In order to have a brand name that resonates with our

target market we selected a word that was synonymous with strength, something that all

men can yearn for. Not just physical strength but also mental strength and alertness,

which is why we decided on “Thunder.” Distributing “Thunder” to convenience stores

was the best option to successfully provide the target market with the most convenience

and frequent exposure to the product. Men visit convenience stores solely for the

reason of convenience, they are there to pick up a product and continue on their way.

Heavy users of energy drinks, such as our target market of men 12-34, are the type of

consumers who seek out energy beverages in order to consume them. The sole

purpose of visiting the convenience store could be to pick up an energy drink. We are

also targeting those who visit the convenience store for others purposes and grab

“Thunder” to gain that energy boost they are looking for to get through their day.

Convenience stores also have the largest gross margin at 50% in comparison to the

supermarket and wholesalers gross margins. The size and physical construction of our

of our can is what truly sets us apart from the competition, being the only available re-

sealable screw top in the energy beverage market. Having a re-sealable top enables

consumers to take the beverage on the road successfully without the fear of spillage or

the loss of carbonation. Men can take their energy drink to work, to school, to the gym,

anywhere knowing that it will travel without spilling a drop. 16.9 ounces is a single

serving size that will be desired by our target market because they are heavy users and

subsequently 16 ounce cans accounted for 50% of case sales. We felt since 16.9 ounce

was similar to 16 ounces it would still be a desired option for our target market. The


price point of $3.50 is established to position “Thunder” just below Red Bull in price per

ounce in the convenience store distribution. Red Bulls price per ounce in the

convenience store distribution is $0.24 per ounce and “Thunder’s” would be $0.21 per

ounce. In order to not directly compete with Red Bull, we wanted to be slightly cheaper

and have the convenience of our re-sealable screw top being an added benefit to get

consumers to choose “Thunder” over Red Bull. In regards to the rest of the competition,

we have placed ourselves on the higher end of price per ounce for the convenience

store distribution channel. The next highest price per ounce is Tab at $0.19. Our target

market will value the benefit of the having the re-sealable aluminum can which will

justify having our price point at the second highest price per ounce for convenience

stores in the energy drink market.

Alternative (2) Introduce energy beverage, targeting adult niche

Our target market for this alternative is adults, both men and women 35-54. This

product is an energy beverage called “Zen”; a 16 ounce can, priced at $1.60 a can. At a

much lower price, the “Zen” beverage will contain less sugar and less of the expensive

ingredient “taurine”, in comparison to other energy drinks. This will fit with the interests

target market we aim to reach by reducing the potential crash-effect of a drink that is

high in sugar. In order to best target this market, it is optimal to have the product

distributed to supermarkets because this where our target market will visit frequently.

The gross margin in supermarkets is 40%, which is slightly less than convenience

stores at 50%. However, convenience stores are leveling off in their sales of energy

drinks and we think our target market will be found in supermarkets more regularly then


convenience stores. Since Dr. Pepper Snapple Group Inc. is a well-established brand in

itself, it will be easier for the company to obtain optimal shelf space in supermarkets

compared to brands that have no established companies behind them. The targeted

group is comprised of busy adults; users within this group represent 34% of all energy

drink users. “Zen” was determined to be the most appropriate brand name for a

beverage to be targeted at adults from 35-54. We felt that promoting this brand as a

calming and stimulating drink would better appeal to this market of adults. Current

energy drinks targeted at heavy user have bolder brand names to appeal to younger

consumers, while “Zen” will promote mental clarity and alertness that will appeal to the

busy adult who is trying to stay alert while getting through their day, stress free. Our

target group is picking up an energy drink while grocery shopping, going to the store to

grab lunch on the go, or walk by and see our product and realize it is something that will

benefit them. Adults are busy spending time with their families, working, and trying to

live fulfilling lifestyles. “Zen” will enable them to go about their busy day with mental

clarity and a boost of energy.

The media expenditure budget for promoting “Zen” to our niche adult market is

$7,000,000. This number is larger than what the majority of the competition is currently

spending on media expenditure in 2007; with the exception of Red Bull who is spending

60.9 million. Since “Zen” is targeting a niche market of adults, we determined

$7,000,000 to be an appropriate number to make our product known in the market.

Since “Zen” is targeted to a smaller group of the market and since the profit on each can

sold is lower, we felt it was necessary to spend enough money to make an impact but

not so much that it would take a long time and a lot of units sold to break even. When


marketing a product to a niche group, less advertising expenditure is needed to be

spent in comparison to the money needed to make an impact when advertising to a

larger group of consumers. Since the manufacturing and bottling aspect of Dr. Pepper

Snapple Group Inc. is well established and functioning, there is less of a need to spend

an excessive amount of money to make a splash in the energy beverage market. Some

consumers will recognize the company behind the brand and try it because they

recognize the name and are familiar with Dr. Pepper Snapple Group Inc.

When determining the size for this niche group of adults we took many criteria

into consideration. We figured that if we choose the 8 ounce size can, which is a unique

size specific to Red Bull, it would subsequently place is in direct competition with that

brand. We wanted to avoid direct competition with Red Bull due to their current market,

loyal customer base, and large media expenditure. Looking at the 24 ounce size can, it

was determined that for the adult niche market that we were trying to target the can size

may be too large for everyday convenience and would not be consumed as frequently

as a smaller size. Therefore, by the process of elimination we decided 16 ounces would

be the size that would best suit our target market. 16 ounces accounts for 50% of case

sales and has the ability to travel well and be consumed more frequently than a larger

size. We want our consumers to be encouraged to consume their beverage as a single-

serving beverage which will encourage repeat purchase. In some cases repeat

purchase will occur in the span of a day.

Since our energy drink is targeting a narrower niche market, we opted for a

relatively conservative price. When trying to attract a niche market you need to have

specialized offerings, which in this case, will be a niche product at a lower price per


ounce. This places “Zen” among the competition as having the lowest price per ounce in

comparison to the other brands in supermarkets. “Zen” will have a pricing advantage

over Monster, Amp, Sobe, Rockstar, Full Throttle and especially Red Bull. Although the

gross margin per unit will be somewhat low, it is our goal to sell more units by pricing

“Zen” as a cheaper niche energy drink at retail price of $0.10 per ounce which equates

to $1.60 in a 16 ounce can. This is the lowest price per ounce for an energy beverage

available in supermarkets. The next highest price per ounce is Monster, Rockstar and

Full Throttle at $0.11 per ounce. On average, an older consumer base is more likely to

be on the conservative side when it comes to the money they spend on functional

beverages.

Alternative (3) Status Quo

This alternative is for Dr. Pepper Snapple Group Inc. to remain at status quo and

not enter the energy beverage market. The threat of the existing competition and the

domination by its five main competitors makes the market difficult for any company to

penetrate. With 94% of the energy beverage market being monopolized by five main

competitors and the remaining 6% belonging to private labels, there is not much room

left for a non-established energy drink to enter the market. 43% of the market currently

belongs to Red Bull; the first energy beverage to introduce itself into the market. Despite

emerging competition, Red Bull has still managed to maintain almost half of the market

share. Regular consumers of energy beverages are considered to be extremely brand

loyal, as the average users varies between 1.4 brands. With consumers being as loyal

as they are to their favorite energy beverage, it is harder to absorb the competition’s


portions of the market share. In order for an energy drink to successfully be introduced

into the market, it would have to do a variety of things: develop a new brand, target a

niche market with specialized offerings, and/or differentiate a product clearly from that of

the competitors. The introduction of a new brand in an established, mature market that

has exhibited signs of slowed growth would need a well devised and well executed

marketing plan. An appropriate advertising budget would need to be quite large in the

initial years in order successfully position the product in the consumer’s minds.

The energy beverage market has begun to see many different energy beverages

enter the market resulting in price erosion. Larger package prices, multi-packs, and the

increase of availability of energy beverages in mass merchandisers are causing lower

prices and resulting in lower profit margins. It is predicted that convenience stores will

continue to have problems with price erosion for energy beverages in the future. In

order for a company such as Dr. Pepper Snapple Group Inc. to break into the energy

drink market, there are a lot of criteria to consider. With this industry already saturated

with strong competition, an energy beverage may not be as profitable as they may have

hoped and therefore not entering the market may prevent Dr. Pepper Snapple Group

Inc. from losing revenue.

Key decision criteria

Our key decision criteria include:

- Profit Margins - The market is a high growth, high profit market. This is

something that was considered when choosing whether or not to enter the market.

- Differentiation - We needed to choose an alternative that made our product


stand out from the competition in order to attain a decent market share.

- Market Choice - We are choosing what we believe is the market that will

provide us with the best potential to be profitable and successful.

Choice and Rationale

We have chosen to implement alternative (1); introduce energy beverage,

targeting heavy users. The “Thunder” brand will focus on males, 12-34. We have

chosen a single serve can at a size of 16.9oz that will include a revolutionary re-

sealable screw cap to differentiate the product from other competitors, especially the

other similar sized cans. This way we follow the general guidelines of entering a

maturing market as a late adopter by (1) Attracting customers with a specialized offering

and (2) Differentiating our product clearly from those of competitors. Our can design will

be of the 16.9oz size to avoid mimicking Red Bull’s renowned 8oz can. It is not our

immediate concern to compete with Red Bull’s share of the market, therefore the 16.9oz

can will compete with the others in that size range. Also, we have chosen to use this

size because it has shown the largest growth, at over 150% since 2004. We provide

newfound functionality by incorporating the first re-sealable screw-top to an energy

beverage. Consumer Trends: Agriculture and Agri-Food Canada (AAFC) are quoted as

reporting:

“For energy drinks and shots, consumers are looking for greater functionality...”

Consumer Trends: Agriculture and Agri-Food Canada (AAFC), 2011


With this choice, we will be using convenience stores as our main source of

distribution. The margins using this channel, although slightly declining, have proven to

be the highest in the industry at about 50%. We feel that this is right where we need to

be to match with our target market of heavy users, which it would be expected our

competition has also come to realize, as reported by AAFC:

“Certain manufacturers have targeted non-specialist retailers, such as convenience stores to

drive product sales. These are appealing due to their potential to capture casual athletes

who currently use these products infrequently or not at all.”

Consumer Trends: Agriculture and Agri-Food Canada (AAFC), 2011

We will be introducing the “Thunder” beverage with an initial media expenditure

cost of $12,500,000. This, we feel, will provide enough of a presence in our first year of

sales to get our product off to a good start and is similar to what TAB energy spent in

their initial year. The physical benefits of energy drinks have already been widely taught

by the pioneers of the industry, such as Red Bull. This means, that we will not have to

spend as much time and money educating the public on what energy drinks do and we

can focus on promoting the brand name, “Thunder” through various media avenues.

A sugar-free alternative was decided against as the regular energy drinks

account for 80% of the market and we do not feel that our target market makes up a

large portion the 20% that would be left untapped.

With this choice, our breakeven is relatively low at only $25,000,000. To reach

this number, we would only have to attain 0.4% of the current total market sales of

$6.2B. This would appear to be easily attainable based on how the competition currently


fares and how Tab Energy fared in their first year. We hope to attain at least 2.5% of the

current market by having sales numbers at $155,000,000 in the first year. These sales

figures are similar to the initial introduction of TAB energy drink.

Implementation

Our goal is to attract our target market, men ages 12-34 by positioning our brand

at the forefront of their minds as the man’s “go-to” energy beverage. An extensive

promotional strategy will aid in placing “Thunder” in the evoked set of our target market

and consumers will recognize our drink as the one that gives you a strong energy boost

that will get you through the day. “Thunder” is a 16.9 ounce can, priced at $3.50. Its

promotion will focus on the convenience of having a re-sealable top so that you can

take it with you throughout the day. The promotional budget of $12,500,000 will be used

on a well devised marketing plan targeted towards men. Advertisements for “Thunder”

will be placed in all of the major men’s magazines, car magazines such as Car and

Driver, fitness magazines such as Men’s Health, and a variety of sports magazines such

as Sports Illustrated. Point of purchase displays in convenience stores will be a large

portion of our promotional advertising. Since energy beverages are a low involvement

purchase and differences between brands are small, it is necessary to have advertising

present at the point of purchase. With low involvement purchases consumers tend to

select brands because they are familiar with, therefore it is necessary for the

promotional efforts of “Thunder” to have a big impact on the target market especially

within its initial year in the market. Having a point of purchase display will show

consumers our product is out there and when they go into the store for an energy


beverage they will be inclined to try the newest energy beverage by Dr. Pepper Snapple

Group Inc. The display will be a large energy drink can cut out, vibrant in color, with

shelving to hold the cans. Consumers will see the display when entering any

convenience store that “Thunder” is available, and will hopefully spark our consumers’

interest. Not only will this grab our target markets attention, but we will also reach out to

the consumers outside of our target market using this method.

Another great way to advertise to our target market is to use social media

advertising on sites such as Facebook, Twitter, and Tumblr. Appealing banner ads with

a click-through to the “Thunder” website is an optimal way to get attention from

consumers who spend a lot of time on social media sites. Similar banner ads for internet

sites that are popular among our target market will also be a prominent part of our

advertising. Sports websites, car websites, fitness websites, as well as miscellaneous

sites that are popular among men are where the majority our internet advertising will

take place.

Sponsoring an athlete in an extreme sport such as motocross will allow us to

have our presence known among our target audience that watches extreme sports. Our

competition is known for sponsoring extreme sports such as motocross. Monster, Red

Bull and Rockstar are all well-known sponsors in the motocross industry. Having

“Thunder” seen among our competitors in the market will give our brand notoriety by the

consumers. Sponsoring an athlete strengthens the “Thunder” brand not only because of

television and promotional exposure but also because it places our brand in the

forefront of consumers mind as a man’s energy beverage. With the advertising


expenditure that Dr. Pepper Snapple Group Inc. is spending on its promotions, our goal

for “Thunder” is to obtain 2.5% of the current market share.

Control-evaluating criteria

The criteria that Dr. Pepper Snapple Group Inc. will use to determine whether or

not the energy beverage “Thunder” is performing successfully in the market will be

based largely on profits and unit sales. Our goal is to obtain 2.5% of the current market

by the end of year one. The current market share that “Thunder” has obtained will be

evaluated quarterly and re-evaluated at year end to see if we have obtained our goal.

Important performance criteria such as how many units we are selling in convenience

stores will be evaluated against the current competition to see how we are performing in

our chosen channel. Since TAB energy has been a newer entrance into the energy

beverage market, we will compare our results in unit sales against theirs in their initial

year. Our media expenditure is also similar to their first year, so this makes the two

performances easier to compare. If “Thunder” does not reach its goal of obtaining 2.5%

market share it will be below the $80,500,000 million in net income that we expect the

beverage to make. At this point we will need to re-evaluate and consider changes to the

marketing mix and to promotional expenditure.

If changes need to be made, we will evaluate the response of our various

sections of advertising is having on our target market. Marketing research will be

completed on our target market to see if we are making the expected impact the

consumers mind. Re-evaluating our promotional themes will be considered as an option

to recover if we do receive lower than expected sales performance.


At the end of year one, necessary evaluations will take place. If they are less

than half the percentage of what we expected we will change course. Changing the

course of where “Thunder” is distributed is also a reasonable option if performance in

convenience stores levels off, as predicted. Changing the various aspects of the

marketing mix will be seriously considered including the changes to the product, price,

place and promotion.

case analysis - dr. pepper snapple group, inc

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